July 22, 2008â€” MultiMediaIntelligence Brief Over the past few years we've seen a veritable explosion of broadband users looking to the Web for video entertainment, fueling the impetus for professional content to make a similar channel play. The recent announcements by Sony and Microsoft, enabling premium Internet video distribution through their gaming platforms, should arouse little surprise.

Over the past few years we've seen a veritable explosion of broadband users looking to the Web for video entertainment, fueling the impetus for professional content to make a similar channel play. The recent announcements by Sony and Microsoft, enabling premium Internet video distribution through their gaming platforms, should arouse little surprise.

In fact, MultiMedia Intelligence predicted this scenario in our Intelligence Brief more than 6 months ago, noting the developing installed base of Internet-enabled video game consoles "represents a 'Trojan horse' with enormous potential for online gaming, music and video downloads, as well as a variety of internet-based value-added services."

Microsoft announced a partnership to bring Netflix's streaming video service to Xbox Live customers. Sony announced videos for rent and sale off their PS3 platform from providers like Fox, MGM, Disney, Paramount and (naturally) Sony, with similar pricing schemes (Xbox Live customers already had access to similar video services). However, while video sharing sites like YouTube have had little problem generating buzz or traffic, albeit with relatively little revenue thus far, the forays into professional content have proven a more difficult proposition. So the questions become,

How much additional value will these partnerships bring to the players within the digital media value chain?

Andâ€¦What do the partnerships foretell about the future?

At its previous zenith, online or digitally distributed (no physical discs) professional content was literally cropping up everywhere, from massive retailers like Wal-Mart down to small sharing sites like Guba. Over time, however, the list of failed and/or cancelled attempts at penetrating this market mounted, including companies like: Wal-Mart, Guba, Google, Akimbo, and MovieBeam (Disney). What went wrong?

Once we peel back the layers and dissect the business models, common threads begin to emerge. The common threads speak to the limiting factors that have thus far stymied end user adoption. Many online only solutions have either precluded or made it relatively difficult for end users to get the content from the PC to the primary TV. Traditional channels, (e.g. physical discs, VoD services, etc) in this case remained the preferred solution to get long-form video to the living or family room; contrast this to short clips of "snackable" content which are well suited to the home computer/office environment.

To this end, a crop of solutions have sought to fill this void (online video to the TV). However, here too, many solutions have only seen a modicum of success. In most cases, the end user is required to buy an additional box, whether it was the ill-fated Akimbo or MovieBeam boxes, or the new Roku/Netflix, or Vudu boxes. While services vary by provider, the theme is similar? a proprietary box that allows the end user to bypass the PC and/or replicating a VoD service.

But here as well, the alternatives such as renting movies at the brick and mortar stores, via mail, or VoD from service providers offer a simpler model: namely, no additional hardware to purchase, set-up, and with roughly equitable per play costs etc. In other words, there is nothing inherently wrong with the brick and mortar/mail services nor are there glaring problems with VoD solutions offered by pay TV operators. In essence, these were solutions/alternatives to a problem that many consumers just didn't see. While flexibility (e.g. content on multiple devices) would have created a more compelling picture, DRM and associated restrictions limited its appeal. As more Blu-ray movies integrate managed copies, the door for differentiation closes that much further. Thusly we arrive back to the game consoles.

While it may seem like a daunting task to penetrate this market, these devices have several factors working immediately in their favor. To start, and perhaps most significantly, they have a sizeable installed base, and hence, a more defined total available market. There is no need to purchase an additional box, although the Xbox 360/Netflix service requires both Xbox Live and Netflix subscriptions. History has shown us that there is tremendous consumer resistance to additional set-top boxes in the living room. The DVR, for example, is the most compelling video application since the VCR and yet even it was hard pressed to create a new spot in the living room. Instead, it gave way to integration.

In addition, the user interface for these new movie services is mostly familiar to those accustomed to the console user interfaces, although the Netflix service requires users to set-up their Queue online. The gaming demographic, however, is likely more apt to not only embrace online services but be more receptive/forgiving when it comes to additional steps. With other features like DVD and/or Blu-ray playback, the console is more readily positioned as the centerpiece of the home's digital entertainment system. Finally, other elements like social networking engender new touch points and ways to enhance the value of the service/content. In other words, it would not be a stretch of the imagination to envision Sony Home users (currently unavailable) inviting long distance friends to not only engage in online game sessions but also into their virtual "living rooms" to watch a movie, voice chat included; in other words a truer emulation of one's extended social network.

Naturally there are risks, such as a dilution of purpose. For example, users may ignore videos or decide not to link their Netflix accounts to the game consoles, maintaining the separation between gaming and other forms of home entertainment. When you consider the multifaceted role game consoles have already adopted, the risks are lower than a standalone digital media adapter (DMA) device. In fact, as more companies like Sony (PS3 & Bravia Link), Microsoft (Xbox 360/Netflix and Media PC), HP (MediaSmart/CinemaNow), and other large CE providers include connectivity into devices that are integral to the home entertainment system, the stop-gap solutions will likely find themselves dis-intermediated.

In the end, the last barrier for professional content delivery via the Internet remains the content holders themselves. Netflix boasts over 100,000 DVDs available for rental, but just over 10,000 movies for streaming, most of which are older and relatively obscure. The large installed base and market acceptance of game consoles might very well bring in new viewers and ultimately make online distribution more compelling to content holders; perhaps signaling an enduring evolutionary step in how we consume our entertainment.This intelligence brief is based on MMI's Internet-Connected TV Devices and Media Home Networking research. MultiMedia Intelligence has two recent reports on the topic:

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About MultiMedia Intelligence

MultiMedia Intelligence, a market research and consultancy firm, specializes on the markets and technologies for delivering and monetizing digital content and services across multiple platforms. We look beyond the classic 'three screens,' which include TVs, mobile handsets, and computers. We put markets into the broader context of the industry ecosystem